One of the silliest spectacles in the battle for the 2012 Republican presidential nomination may be unfolding in television advertisements right now as a group of avowed believers in free markets and capitalism get huffy about the fact that one of the GOP candidates has – gasp! horrors! – made a rather nice living from being a private-equity fund manager.
To be sure, buyout fund managers aren’t candidates for canonization. They can be ruthless, and they’ll use their clout to cut the best possible deal for themselves and their investors every single time, often at the expense of other participants in the financial markets – just ask any investment banker whose boss has told him to bid on a financing package for a multi-billion dollar buyout.
But the issue here isn’t that Mitt Romney might not have played nicely with investment bankers or his fellow financiers when cutting deals for Bain Capital. Nor is the problem that Romney made many millions from his role taking a company private (or acquiring a still-private business, or purchasing a division of another business), overhauling it and stripping away any inefficiencies, and then selling it on to someone else. He isn’t even being raked over the coals for structuring crummy deals, using excessive leverage and putting the financial system in jeopardy, or getting involved in one of those seemingly endless roundabout transactions in which a company (hmm, let’s say a mattress company?) is sold from one private equity group to another, and on to a third, and a fourth, and on and on. (I’m not saying that either Bain or Romney was involved in such shenanigans, merely that they might represent a valid basis for criticism.)
Nope, the issue appears to be that Romney actually believes in the free markets. When asked to take an underperforming or unprofitable business and overhaul it, to strip away any inefficiencies, he actually did it. In other words, he cut jobs. That’s just downright un-American, Romney rivals like Texas Gov. Rick Perry and former U.S. House Speaker New Gingrich seem to be saying. Perry on Monday compared Bain Capital to vultures. And a pro-Gingrich super PAC is about to unleash a television ad campaign in South Carolina comparing Romney’s lavish lifestyle (the American dream) with the plight of former workers who lost their jobs after a Bain-sponsored buyout of their company (the American nightmare).
Unsurprisingly, the private equity industry – already on the defensive after a battle to stop the “carried interest” they earn on profitable investments being taxed as ordinary income – is storming to the rescue of Bain and Romney. Buyout funds don’t take deposits from general investors (or, even worse, taxpayer funds in the form of bailouts), put the financial system in jeopardy and pay out lavish bonuses. They may earn millions, but it comes as their share of the profits from a series of transactions that have paid off for their investors as well as themselves.
After all, if a company is thriving and successful – and its value is fully reflected in the public stock market – there’s no point in a Bain Capital taking it private and overhauling it, because there would be no upside potential. And on the flip side, if cutting jobs is what has to be done to make a company efficient and attractive enough to sell at a profit, well, so be it. Isn’t that what the free markets that all the Republican candidates profess to believe in are all about? Is preserving jobs in the private sector any different than allowing inefficiency in the public sector, the evils of which candidates of all political stripes like to bewail?
Should any business – regardless of whether it’s owned by a group of shareholders and traded on the stock exchange, or by a bunch of venture capitalists or even some buyout funds – feel obliged to hang on to employees if it needs to cut headcount in order to stay competitive or to earn profits for those investors? The bottom line is that it’s not the job of corporate management and shareholders to create jobs or eliminate them. It’s to run a business efficiently and profitably for investors. That’s their fiduciary duty.
Perhaps Gingrich and his fellow Republicans feel they don’t have much to lose by blasting away at the private equity industry. After all, an analysis by the Maplight Foundation recently showed that individuals and political action committees tied to the buyout biz forked over nearly twice the sum in donations to Democratic candidates as they did to Republicans.
Still, given that the Republican candidates are vying for the right to oversee and regulate the financial services industry – including private equity – it would be nice to think that they understood its role in the free market system and what distinguishes it from other parts of Wall Street, such as investment banking. The Private Equity Growth Capital Council, an industry lobbying group, has its own axe to grind, of course, and it may yet lose the battle over how the industry is taxed. But it’s to be hoped that it wins the war and gets presidential and congressional candidates alike to understand that it’s simply one part of the free market system that all profess to support.
Certainly, the private equity industry is no more free from folly and excess than other parts of Wall Street. At the height of the buyout market and the era of easy money, in 2006 and 2007, deals were being done so quickly and with so much borrowed money that bankers who were scrambling to assemble the transactions began to worry that the leverage with which the companies were being burdened was excessive and that deals were simply getting too big. But in a free market system, it’s caveat emptor: If bankers don’t want to do the deals or investors don’t want to finance them, they walk away. If a company is concerned about its workforce, it doesn’t have to sell to an investor known for Gordon Gekko-like tactics.
Admittedly, it would be tougher for a presidential candidate like Gingrich to blast away at the financial industry’s real problems, not least because the latter don’t lend themselves to being translated into sound bites and associated with a rival candidate’s background. But in order to be taken seriously as a presidential contender, a candidate should at least demonstrate a basic knowledge of the financial industry’s working parts.